While its usage has recently declined, some notable organizations
still embrace stack – or forced – ranking when it comes to employee
evaluations. Some say such a method can produce 'toxic' results, while others call
it the 'kindest' form of management.

By Andrew R. McIlvaine

Wednesday, September 25, 2013

A
high-performing company requires a high-performing workforce -- and that means
you need a weeding-out process for routinely culling the low-performers from
your ranks.

This
is the fundamental rationale behind the employee-evaluation system known as
stack ranking, forced ranking or -- more colloquially -- "rank and
yank," which was popularized by former General Electric CEO Jack Welch and
subsequently adopted by many other prominent corporations. In stack ranking,
managers are required to rank employees into five or so groups based on their
performance -- those in the top group receive bonuses and promotions, while
those in the bottom are separated from the organization.

Microsoft
was among the companies that adopted stack ranking. Last year, an extensive report
in Vanity Fair by writer Kurt Eichenwald cited complaints by
current and former Microsoft employees that the process encourages employees to
compete with one another rather than cooperate, while managers were preoccupied
with "horse trading" with one another to ensure their prized
employees weren’t given low ratings that could put them in danger of being
forced out.

Eichenwald’s
piece received renewed attention with last month’s surprise announcement that
Microsoft CEO Steve Ballmer would retire within
the next 12 months. In recent years, Microsoft’s stock price has stagnated and
its efforts over the last decade to move into hot new areas such as tablet
computing and online search have mostly fizzled, although its core software
products remain profitable.

In
an interview with the Seattle Times last month, Ballmer defended stack ranking.

"I
think everybody wants to work in a high-performance culture where we reward
people who are doing fantastic work, and we help people who are having a hard
time find something else to do," he said.

Welch
has also defended the approach. In an interview with the Wall Street Journal
last month, he described the ranking system as "the kindest form of
management. [Low performers] are given a chance to improve, and if they don’t
in a year or so, you move them out."

A
Microsoft employee, who asked to remain anonymous because he wasn’t authorized
by the company to speak to the media, says he believes Microsoft’s
performance-evaluation system is fair and disputes the allegations by some
Microsofters quoted in the Vanity Fair piece that the system has hurt
the company’s performance.

The
system does, however, pressure employees to ensure their manager’s peers -- not
just their manager -- are aware of their good performance, he says.

"[The
system] has helped me pay more attention to the 'socialization’ of my work --
to not only do a good job and deliver results, but have those results shared
with more than just the person whom I immediately report to," he says.

In
his most recent evaluation, the employee says he received the highest score
possible. During the previous year, however, he’d received a mid-range score.

"I’m
the same worker doing the same caliber of work -- the only change is that I’ve
learned there are rules to the game," he says. "During that first
year, it was a daunting task figuring out -- in addition to doing a good job --
how to convey the importance of what I was doing. There’s a lot of selling
required in addition to performing."

Stack
ranking is not nearly as popular as it once was: From 2009 to 2011, the number
of companies that reported using a forced-ranking system declined from 42
percent to 14 percent, according to a study by the Seattle-based Institute for
Corporate Productivity, a long-time critic of the approach.

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"It’s
not a sustainable model -- it can really produce a form of toxic
leadership," says Marsha Ershaghi Hames, a practice leader for education
solutions at New York-based LRN, a firm that advises companies on culture and
ethics. Many clients have moved away from stack ranking in recent years in
favor of a "trust-based" approach that focuses on helping managers
provide quality feedback, she adds.

"It
fosters a healthier, more self-reliant culture," says Ershaghi Hames.
"You coach managers on how to make those hard decisions about poor
performers and then let them exercise their best judgment. If you’re hiring
good leaders, then you should be able to extend your trust to them."

Stack
ranking is based on "norm referencing," says management consultant
Jeff Howard -- the idea that intelligence is innate, fixed at birth and
unequally distributed. Not coincidentally, he adds, many CEOs tend to see
themselves in the top group.

The
approach can force organizations to make potentially destructive decisions,
says Howard, who’s advised Wall Street firms on management strategies in the
past and is currently CEO of the Efficacy Institute in Waltham, Mass.

"Consider
the Boston Red Sox -- there is no bottom group on this year’s team," says
Howard. "But under stack ranking, you’d be forced to take the current team
and divide them into groups just so you can do the manly thing and get rid of
the bottom group.

"You’d
be getting rid of highly capable people just for the sake of adhering to the
system," he says.

"During
my freshman orientation at Harvard back in 1965, the university president told
each of us to look to the person on our left and to the person on our
right," he says. "We all held our collective breath, because we thought
we knew what he’d say next. But here’s what he said: 'We expect all three
of you to graduate on time and with honors -- because Harvard does not
make admission errors."